Weidmann: Bank union should cap sovereign exposure

ChristopherLawton

A European banking union should come with a measure that limits bank exposure to government debt, and banks should set aside capital to back their government debt holdings, a European Central Bank Governing Council member said Monday.

"There should be a limit, a kind of large exposure limit, for the exposure of individual banks to sovereign debt," said Deutsche Bundesbank President Jens Weidmann, speaking at Euro Finance Week in Frankfurt.

"Banks should shore up the risk of government bonds or loans to the state with capital," the German central banker added.

These measures, Mr. Weidmann said, should help shield the banking system from imbalances in state budgets. It would also lead to early price signals of looming fiscal difficulties and pressure member states to consolidate their finances. The Bundesbank has advocated before that such capital buffers be introduced, albeit not immediately. In his speech, Mr. Weidmann said the banking union should be established quickly, but not too hastily given the many open questions concerning its implementation.

European leaders in Brussels agreed in October to establish a new European bank supervisor, under the authority of the ECB. The single supervisor is the first step toward a full European banking union that would also include a resolution mechanism to wind down troubled banks and eventually a joint bank deposit insurance scheme.

Mr. Weidmann said the decisions made by the banking supervisor should be weighed by the share of capital countries contribute to the ECB, which would give Germany and other larger member states more say. The banking union should also come with the ability to intervene on a European level, should a member state breach European rules or the requirements of rescue measures, he added.

While the banking union could be a pillar for a stable monetary union, depending on how it is designed, the Bundesbank president warned that it won't solve the euro-zone sovereign debt crisis.

"If the banking union primarily serves, through the back door, to introduce a joint liability and give states simply more opportunities to rack up debt, then that would be a disservice to the monetary union," Mr. Weidmann said.

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